Shareholders of Commonwealth Bank of Australia (ASX: CBA) have been well rewarded over the last six years or so, but its performance over the last 12 months has been somewhat muted.
Although it looked set to be another year of incredible returns, the bank's record-breaking rally was cut short when the stock plummeted 18% between March and June, narrowly avoiding an official bear market.
Although it still managed to beat the S&P/ASX 200 (Index:^AXJO) (ASX: XJO), its total return for the 2015 financial year (FY15) was a mere 5.3%, compared to 23.4% achieved in FY14 and the 24.3% return from FY13 (returns not including dividends).
Should you own Commonwealth Bank in FY16?
Commonwealth Bank has, for a long time, been the go-to stock for investors seeking both security and a solid income stream. In a low interest rate environment, the bank's profits have thrived while it has been able to steadily increase its fully franked dividend payments, making it the ideal stock for almost any investor over that period.
Source: Company Annual Reports, Yahoo! Finance
Over the last year however, a number of cracks have begun to appear which could threaten the bank's returns over the coming years. To begin with, house prices have gotten out of control which could threaten future loan growth while the decline in bad debt charges has also slowed, and could soon reverse course to act as a weight on overall earnings.
Furthermore, given the headwinds facing the economy, APRA, the Australian Prudential Regulation Authority, wants each of the banks to hold more capital in reserve in case of a serious economic downturn. That in itself will impact their returns on equity, and could ultimately restrict their ability to grow or even maintain their current dividend payout ratios.
As it stands, Commonwealth Bank's shares trade for $85.13 per unit which is 12% below the all-time high of $96.69 achieved in March this year. Although some investors believe the shares can recover and will go on to crack the $100 mark, I believe the stock is priced for perfection and that now is the wrong time of the economic cycle to buy the banks.
While investors who sell today could be missing out on some gains in the near-term, now could be an excellent time to reduce your exposure to the sector and put your money to work elsewhere where higher returns seem much more achievable.
